Astec Industries Inc (ASTE) 2010 Q4 法說會逐字稿

Greetings. Welcome to the Astec Industries fourth quarter 2010 financial results conference call.

At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions)

It is now my pleasure to introduce your host, Steve Anderson, Director of Investor Relations. Thank you, Mr. Anderson. You may begin.

Thank you, Kristine. Good morning, and welcome to the Astec Industries conference call for the fourth quarter and fiscal year ended December 31, 2010. As Kristine mentioned, my name is Steve Anderson, and I'm the Corporate Secretary and Director of Investor Relations for the Company. Also on today's call is Dr. J Don Brock, our Chairman and Chief Executive Officer; McKamy Hall, Chief Financial Officer; and David Silvious, our Corporate Controller.

In just a moment I will turn the call over to McKamy to summarize our financial results and then to Don to review our business activity in 2010 and also provide some comments on 2011. But before we begin, I will remind you that our discussion this morning may contain forward-looking statements that relate to the future performance of the Company and these statements are intended to qualify for the Safe Harbor liability established by the Private Securities Litigation Reform Act. Any such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions. Factors that could influence our results are highlighted in today's financial news release and others are contained in our annual report and our filings with the SEC. As usual, we ask that you familiarize yourself with those factors.

At this point I will turn the call over to McKamy to summarize our financial results for the fourth quarter and full-year of 2010. McKamy?

Thanks, Steve. We appreciate each of you joining us this morning.2010 is a very notable year of achievement when you consider that the Company faced very tough economic conditions but yet achieved a 79.3% increase in net income compared to 2009 after excluding from 2009 the impairment charges. The 79.3% increase was on a 4.5% increase in annual sales. We will discuss key factors for this improvement and Dr. Brock will add to my comments. Net sales for the quarter were $190.8 million in the fourth quarter, versus $177.9 in the fourth quarter of 2009 for an increase of 7.3%, or $12.9 million.

Aggregate, Mobile Asphalt Paving and Underground segments had increased sales compared to prior year. The expenditure of the stimulus funds, tax reasons and buying Tier 3 versus Tier 4 engines positively improved the quarter. International sales were at $71.2 million, versus $74.8 million, for a decrease of $3.6 million. International sales were 37.3% of the fourth quarter total sales in 2010 and they were at 42% of the total sales in the fourth quarter of 2009. The decrease of international sales for the fourth quarter compared to the fourth quarter of last year occurred primarily in Canada, Middle East, Asia, Central America and Australia. International sales increased in the Aggregate and Mining, Underground and Mobile Asphalt Paving Groups.

Domestic sales for fourth quarter increased 16% to $119.6 million, versus $103.1 million for the prior year. Part sales for fourth quarter 2010 were at $50.8 million, versus fourth quarter of 2009 are at $44.1 million, a 15.2% increase. The parts were 26.6% of quarterly sales in 2010 versus 24.8% in 2009. And we continue to try to do everything we can within the Company to improve those numbers. The parts business is very, very important to us. The Aggregate and Mining Group had the largest dollar increase at 26.7%, followed by Mobile Asphalt Paving of 35.7% in the Asphalt Group. The net sales by segments in perspective of a pie, Aggregate and Mining Group had 36.8% of the total sales, the Asphalt Group had 23.9%, Mobile Asphalt Paving 21.2%, the Underground Group 9.6%, and Other 8.5%.

On a year-to-date basis, our net sales were $771.3 million versus $738.1 for an increase of 4.5%, or $33.2 million. international sales were at $294.4 versus $272.6 for the prior year, or an increase of 8%. The increase in international sales occurred mainly in South America, Africa, Canada, Central America and Australia. International sales were 38.2% of net sales in 2010, compared to 36.9% for 2009. The international sales increased with the Aggregate segment and the Mobile Asphalt Paving segment. domestic sales year-to-date were at $476.9 versus $465.5, or an increase of 2.4%. Part sales were just right at four times what the fourth quarter were, or $200.5 million, versus $180.3 million, for an increase of $20.2 million, or 11.2% for the year. Parts were 26% of the total sales in 2010, versus 24.4% in 2009. 72% - - and this is an interesting note - - 72% of the increase in Parts came from the Aggregate segment. Sales by segment for the year-to-date; Aggregate and Mining were at 33% of total sales, Asphalt 29.4%, Mobile 21.6%, Other 8%, and Underground 7.8%.

Our consolidated gross profit for the quarter was at 44.3%, versus 31.2%, or an increase of 13.1% or 42%, and that was on the 7.3% increase in sales. The Company had a very unique fact occur in the fourth quarter and I believe it is probably the first time I have ever seen this is the gross profit dollars actually increased $13.1 million, which exceeded the sales dollars increase of $12.9 million for the fourth quarter. The gross profit percentage increased 570 basis points for the quarter to 23.2% from 17.5% in 2009. Certainly the utilization of capacity improved in the fourth quarter. The under-absorbed overhead decreased by $4.8 million in the fourth quarter. I think this is a compliment to the management of our subsidiaries.

The segments by gross profit, and this is the percent of profit for this segment. The Mobile Asphalt Paving segment in the fourth quarter achieved a 28.3% margin, Aggregate and Mining 24.9%, Asphalt 21.7%, Other 21.6% and Underground 10.6%. The actual increase in dollars of gross profit was lead by the Aggregate and Mining Group followed by the Mobile Group. For the quarter in summary, part sales increased, equipment sales increased, plant utilization improved and gross margins increased. The consolidated gross profit year-to-date is at $179 million, versus $152.4 million, or 17.5% increase. 17.5% increase is on a 4.5% increase in sales.

The gross profit was at 23.2%, versus 20.7%, or an increase of 250 basis points for the year. Again, and I realize I am repeating, but the plant utilization improved, the under-absorbed overhead decreased and for the year it decreased by $9.4 million. Again, I think a compliment to our management. Our manpower actually increased 147 people, or 4.7%, and a lot of this relates to sales in new areas and sales both international and domestic, but also in new areas that we're trying to cover and expanded areas. The direct labor hours for manufacturing actually declined from $2.616 million, to $2.6 million. So, just a very slight decline. The gross profit by segment for the year, and this is the percentage for each segment; Mobile Asphalt Paving was at 26.8%, the Asphalt Group was at 24.8%, Aggregate and Mining at 23.7%, Other at 21.3% and Underground at 7.4%.

In terms of the increase in basis points, the Other Group actually made the greatest improvement, which includes Peterson and Astec Australia, followed by the Mobile Asphalt Paving Group. The actual increase in dollars of gross profit was led by the Aggregate and Mining Group, and second by Mobile Asphalt Paving. The SG&A and engineering in the quarter was at $36.3 million, versus $32 million, that being 19% and 18% respectively of sales, an increase of $4.3 million. We only had a couple of areas that were above $1 million each; commissions and travel exceeded $1 million and the payroll and related increased $3.6 million. The other areas were at less than $1 million each. And I had a special request to share with you that ConExpo expense for the quarter was $200,000. And this is the up coming ConExpo in the current year.

In the year-to-date SG&A and engineering was $131.6 million, versus $125.5 million for a 17.1%, versus 17%, respectively. Again, the same areas had increased in terms of commissions and travel, and payroll and related areas that were above $1 million, and those were the primary areas. Income from operations had an income in fourth quarter of $8 million, versus 2009 of negative $17.9 million. Year-to-date income from operations was at $47.4 million, versus $9.9 million. And attached to your press release, if you follow us, is the segment data that we would like to provide to you, which is pre-federal tax income by segment. We have also attached this time a second sheet which is a reconciliation of pre-tax income excluding the impairment in order for you to hopefully understand the segment comparison of 2010 to 2009.

Now, on that sheet we highlighted the lines on the reconciliation to try to make it easy for to you relate the increases that we wanted to highlight, or the changes, to the second paragraph, last sentence of the press release. So, I hope we made that as easy as possible to relate, for you to relate to and to follow, and that is a difficult subject. On the reconciliation, the increase, or the increase in the aggregate is the primary segment impacted by the impairment. So, that presents a clear picture, I hope, to you, of how much the actual increase was by the Aggregate Group, excluding the impairment. In the second box from the top, the change in the second box reflects the increases in pre-federal tax profit at the Mobile, Paving and Aggregate and Mining segments. And I think those are two of our highlights for the year.

Of course it reflects it for all segments and it ties and reconciles, so, hopefully that will be helpful to you. Our Other income is primarily the result of investment income by our Captive Insurance Company. The effective tax rate last year was significantly impacted by the goodwill write-off impairment there. And this year, the tax rate is at 33.1% and the 2010 rate is a mixture of increasing state taxes offset by additional R&D credits, and increased domestic production activity deductions. The domestic production activity deductions increased for two reasons. Increased because of the profitability of the manufacturing, which is exhibited in our numbers, and the rate for the allowed deduction legally increased from 6% to 9% in 2010. On the net income attributable to controlling interest, in 2010 our net income for the quarter was $6 million, versus a net loss last year of $15.5 million. And excluding the intangible asset impairment charges the net loss was $0.4 million.

For the quarter net income per diluted share was $0.26, versus a diluted loss of $0.69 per share in fourth quarter of 2009. Excluding the impairment and all of this, I hope you can follow in the additional sheet we gave you. Excluding the intangible impairment charge in fourth quarter 2009 we had a loss of $0.02 per share.In fourth quarter 2010, we had $0.26 earnings per share, so that provides an increase of $0.28 per diluted share comparing 2009 to 2010. Year-to-date net income was at $32.4 million, versus $3.1 million net income for an increase of $29.4 million, attributable to controlling interest. Excluding the intangible asset impairment charge, the net income was $18.1 million, for an increase of $14.3 million, or 79%. And again, you will find that on the reconciliation sheet. Our diluted year-to-date earnings per share were $1.42, versus year-to-date diluted earnings per share of $0.14.

Excluding the intangible asset impairment charge in 2009, it was $0.80 per share. The earnings per share for 2010 is $1.10 compared to the $0.80 to provide a 77.5% increase in earnings per share. Our backlog is also attached to the press release for your convenience. Our backlog is at $216.6 million for December 31, 2009, compared to $135.1 million for the prior year. This is a 60.4% increase in backlog. The backlog in January has also improved nicely above that level. The international backlog at December was $109.6 million, compared to $62.6 million for international, for a 76.2% increase in international. The domestic backlog increased from $72 million to $107 million, for a 46.8% increase.

And the backlog broken down by segment; the Asphalt Group, and Don is going to comment to some of this regard later, but the backlog for Asphalt has gone up 43.9%, Aggregate and Mining 71.5%, Mobile Asphalt Paving, which normally does not have much of a backlog, is up 318.6%, the Other Group is down slightly and the Underground Group is up 155.2%. The December 31 backlog which many of you like to compare to September 30, is $216.6 million, versus $145.6 million for a $71 million increase, or 48.8%. Our balance sheet is very strong. The strength of the balance sheet is allowing us to seek strategic opportunities. And as our press release indicates, we are seeking both domestic and international acquisitions. Our receivables are at $80.9 million, that compares to $68.1 million for last year, and the increase is basically equivalent to the quarterly sales increase over the prior year.

The day's outstanding are at 38.5, and the day's outstanding last year were at 35.5. So we have no concerns there. And inventory, our inventory is at $253 million, it was at $248.5 million last year. Our turns are at 2.4, versus 2.1. Our raw materials are up. Our work in process is up. Finished goods are down, and used and rental equipment are up slightly. And I think you should view the inventory in light of the backlog that we have and the orders that we are trying to provide for that backlog. There is nothing owed on our $100 million credit facility. We have $94.6 million in cash and cash equivalents. Letters of credit are $7.6 million. Our capital expenditures for the year were at $11.3 million. Our depreciation was $18 million.

We have budgeted for 2011 $18.8 million in depreciation and budgeted for capital expenditures $29.4 million. We will be attaching our cash flow to the upcoming filing next week. We had cash provided by operating activities of $62 million, issuance of stock $1.4 million and capital expenditures utilizing our cash of $11.3 million. This is a good report for 2010 and a good backlog on which to start 2011.The ConExpo expenses are expected to be $2.1 million for the first quarter and will total for the entire year $2.6 million for this every three-year event that we incur in terms of exhibiting our equipment.

This concludes my prepared remarks on the financials. I'll be available to answer any questions you may have later in the call. We do appreciate your interest in Astec. Thank you.

Thank you, McKamy. Dr. Don Brock will now discuss the Astec's business operations for 2010. Don?

Thank you, Steve. First just a few comments on the fourth quarter. As you know the fourth quarter is generally our slowest quarter and obviously was better than we expected. As McKamy said, the revenues increased from $178 million to $191 million for a 7.3% increase. We saw at year-end some delayed shipments which we normally had in most quarters but we had an inordinate amount of bad weather, as all of you know, in late December and early January. Gross margins increased from 17.5% to 23.2%, for a 570 basis point increase.

We had a pretty good increase in part sales that helped those numbers. After tax profits increased from a loss of $1.8 million if you forget the - - basically without the goodwill write-off to a little less than $6 million for the quarter. Our earnings per share grew from a loss of $0.14 without the goodwill write-off to $0.26. We saw a continuing weakness in domestic sales into the last three weeks of the quarter. When Congress passed the tax extensions and accelerated depreciation, it is kind of like turning the switch on. We saw a dramatic pick-up in orders domestically. international sales saw a continued improvement throughout the quarter, and the backlog at the end of the year was a little over 50% international, and a little less than 50% domestically. This compares with about 18% five years ago, international sales. Our backlog was $217 million, versus $135 million at year end, and that is up from approximately 60% to 61%.

We saw, again, during the quarter an extension of the highway bill and a new effort to reduce deficit spending. At this time any new Transportation Bill would probably be less than the existing bill based on what we are hearing. Depending on whether you talk to a Republican or a Democrat. The Asphalt contractors, which are our largest customer base, in our opinion is probably better off under this situation with only extensions. A new smaller highway bill when passed would allow states to engineer larger bridge and interchanges, leaving less money for Asphalt. The extensions allow only a short time for the projects and are predominantly asphalt pavement. And most of our customers are doing quite well at this time due to the amount of asphalt paving that is going on.

With the somewhat pent up demand, the way we see going forward, we believe the Asphalt business will continue to be okay. The bad weather certainly creates a pent up demand for pavements and for repairing pavements. I recently read that pavement is considered as a roof of the road, and we sure have a lot of roofs leaking and all of these need to be repaired. The 100% depreciation gave a lot of inspiration to our privately-owned customers to spend money and go ahead and replace things that they have been waiting to do. So, we have seen a noticeable pickup in our business after the 100% depreciation was enacted.

Looking at the whole year of 2010, it might be called a year of adjustment. With all the uncertainty at the beginning of the year of 2010, we encouraged our subsidiary companies to right-size, diversify their products, expand their R&D efforts, expand their international sales and sell and apply their equipment to use in other industries. We formed a new mining sale's group and are continuing to grow that group. We established and grew our part sales forces and saw a growth from $180 to million to $200 million, or 11% during the year in part sales. We believe that we have increased our market share in most of our major equipment lines and believe that we are in a strong position to continue to do this.

The Underground and Asphalt businesses actually did not see a bottom of the cycle into the second or third quarter of 2010. When we entered the downturn in September/October of 2008, the Asphalt Group had significant backlogs and that helped carry them through a big part of 2009. But the actual bottom of the cycle for Asphalt plants in our opinion was about third quarter, and equally this slow with the Underground Groups. We are beginning to see improvement in both the two Underground companies and saw a considerable pickup in Asphalt sales in December of 2010. Peterson and Astec Australia, also should have shown slight improvements in the last few months.

Looking forward to 2011, we see continued growth in international sales, and the Asphalt, Aggregate, Mobile and Underground segments of our businesses. We believe domestic sales will continue to benefit from the 100% depreciation, although growth will continue to be slow. We expect to see more volume from the mining sales and are seeing these particularly in the Aggregate side of the business. In late March we will have one of the largest equipment exhibitions in the world at ConExpo, and expect at that time to get a better read on the market as it - - as we look forward to get better visibility.

What are our concerns in the business? We see considerably inflation, particularly in steel. While we are locked in on a considerable amount of our steel up through the second quarter, the price increases are somewhat rampant at this time. A direction in the highway bill would certainly help visibility of our customers and our business. And some more direction in what we are doing in energy and the type of energy would certainly be helpful. As McKamy said, our balance sheet is strong, we continue to look at acquisitions of companies and products both domestic and internationally. We continue to divest, and to develop, and to perfect a number of new product lines and will continue this effort through this year.

Over the last five years we have doubled the Company's net worth through earnings growth, particularly by organic growth. We have set a goal to again, over the next five year to double our size. Our goal is based on growing organically at 10% and growing through acquisitions at 5%. We expect to see growth in 2011, but probably not as good as we see in the latter part of the cycle as we look forward to the next five years and as the economy continues to improve.

I will be glad to answer any questions at this time that anyone has. Thank you.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) One moment please while we pole for questions.

Thank you. Our first question is from Rich Wesolowski with Sidoti & Company. Please proceed with your question.

Thank you, good morning.

Good morning, Rich.

Don, I think this is maybe the third call in a row where you've warned about inflation building in your area of the economy. Where have you begun to see that among your input costs and what is the plan to combat it?

Well, the major place is in steel. Steel tried to push up, I guess, this time last year and was not successful as the economy kind of backed back off. But, they seem to be continuing to try to push it up. We thought, I guess, in the second quarter of last year, that probably by June we would see it go up again. They may be doing a better job at propagandizing than we think. But the economy is stronger, and I think they do need some increase.

But we have seen - - we are expecting up to 40% increase over the low point in November of last year. It depends on the world economy, it's a world pricing thing now. To combat it, we have tried to buy forward, which we have a lot forward and we have those at good prices. But we are doing everything to get better steel utilization by nesting and things like that, and put a lot of focus on that in the last two or three years. So, that is about all you can do. The other affect of it, though, it is a secondary affect, but a lot of the components that we buy are affected by steel also.

Okay. Are you confident in the Company's gross margin can expand in 2011?

I don't know where I would say I am real confident of that. I think we can hold a margin in spite of the rising steel components. To say it will continue to rise, I wouldn't be that confident.

Okay. Then lastly, I was surprised to see the domestic revenue and bookings look sharp given the lack of clarity on the public funding for roads. Could your domestic business grow even modestly without a highway bill?

Yes, I think so, Rich. It is a little surprising, but all of our customers - - I just got back from a National Asphalt Pavement Association meeting. And most of them ended up having like us a much better year than expected. And it seem to be, as I mentioned earlier, there is a disproportionate amount of the federal highway funding going to Asphalt paving. The states are still struggling with their budgets, but they've got to maintain the road at a certain level.

International is stronger than kind of our numbers pointed out. A big portion of the sales in December was international, and that is reflected by our backlog, but we didn't actually get the shipments internationally right at the end of the year. Some of the sales came in late in the quarter. One big crushing order for about five crushing plants we received in the fourth quarter and did not ship any of that. It will it be shipping in the first quarter. So, we sold more internationally in the fourth quarter than we shipped. So, we feel fairly comfortable. The domestic side, I expect it to still remain weak. Although they've waited for about three years. I've talked to some of our largest customers, and they are not doing complete asphalt plants or complete crushing plants, but they are making component replacements. So, there is a certain amount of just slow, pent up demand that is breaking loose.

Great. Thank you very much.

Thank you.

Our next question is from Chris Weltzer with Robert W. Baird. Please proceed with your question.

Morning, guys.

Morning, Chris.

Can you talk about how the new models of equipment, with Tier 4 engines, how that rolls out this year? Is it going to be gradual? Are they all going to come at once? And whether you think some of the strong order activity or any idea how much the order activity you saw in the fourth quarter was people trying to secure slots or units with Tier 3 engines in them?

Right. Chris, there is a flex program there where we can basically use so many Tier 3 engines as we phase others into it. We are basically utilizing a portion of that. It is our goal to have all of the Tier 4 models that we're required by January 1. And we are pretty much on target with that. We have had a supply problem out of caterpillar-owned engines on Tier 4's. They claimed they were going to be ready, but on certain sizes they are not ready and certain sizes we have had trouble getting.

The flex program will back fill that, but - - I guess, I anticipated a somewhat early order of those. I have been pleasantly surprised with the continuing sales at Roadtec and Carlson. They have done very well and their business continues to stay very strong. So, we will phase in over the next six months to the Tier 4's. I am not real excited about Tier 4's, nor is anyone else, but that is what we've got to do. I think it is an over stretching of the EPA, but the engines will end up using more fuel. And I guess in total product, put out more emissions.

You've got to idol them at a high speed and a number of problems related to that I could talk - - use all the time we've got, but I won't do that. But, it is a challenge. It makes the engine packages probably 50% larger than others, so it is required to redesign most of our products, and we are pretty well at the end of that.

Okay. Can you talk about how much gross pricing will have to go up to support these engines?

You are probably looking - - some of the price increases we have seen is all the way from 12% to 50% increase in engine processes. When you are taking away at the end of the product, probably a 4% to 5% weight of the total product on an average.

Okay. That is very helpful. And then can you talk about how orders have looked for your oil and gas horizontal drill rig business? And maybe talk a little bit about the potential to get something close to break even, or at break even in Underground next year?

Yes, the Underground business is particularly, American Augers, hit bottom at about the third quarter. We have seen a gradual pickup and we're seeing probably the most activity that we have seen since 2008 there. A lot of interest in the directional drilling. Both for oil and gas, and I guess I am quite excited that that's about to take hold. We built that new facility up at American Augers and finished it last year and it has been sitting there practically empty. We kind of started it at the wrong time.

But orders have picked up both on horizontal drills and on the oil and gas rigs. We think - - I pretty well assure you that augers are going to be profitable and should have a fairly decent year this year. Underground on the trenchers, the little trenchers have picked up a little. Big trenchers are still very slow. It's the one business that we've got that is still dragging right at this point.

Okay. That's helpful. There looked like a fairly big sequential jump in what you guys reported, sort of the loss from all other segments, includes some corporate expense and things like that. You talk what about drove that and what the outlook for that line is for next year?

Peterson and Astec Australia, Australia is growing and we believe that it will do better this year. We had an exchange loss over there in the fourth quarter that was the inventory we put in and was pretty substantial loss on the exchange rate. Peterson's business has gradually picked up.

I am proud to say its on new products, primarily on drum chippers and things like that. We have not realized anything except expenditures at this point on the wood pellet plants and that. We are building our first complete wood pellet plant, and still have things to work out on that. But we see continued growth in that area. But, Peterson's business in the last month has picked up quite a bit. But it's been slow. We made money last year, but that is about all you can say.

Okay. Any quantification on how big the exchange loss was?

It was about $750 million, $760 as I recall.

Okay. Thank you, guys.

Thank you.

Our next question comes from David Wells with Thompson Research Group. Please proceed with your question.

Good morning, everyone.

Good morning, Dave.

Just first off, if I look the swing in margins from Q3 to Q4, sales were up a fair amount, but then we saw the gross margins soften a little. Is that some of the inflation coming through, or were there some other items that were contributing to that?

I think from Q3 to Q4, I've got to think about it a minute. Part sales were probably stronger in Q4, which helped. What's the margins in Q3? I don't have that in front of me.

No.

Q4 is usually a very weak quarter. Better than usual this year, but - - I guess the only thing I can say on 23.6 in 3 and 4 was about the same wasn't it? It is about the same between the two. I am not sure a I am following your question.

Okay. We can follow-up off line afterwards. I guess, if you look into 2011, if you've got the inflation headwind component, are you still seeing under-absorption from an overhead perspective, that if we don't see the top line accelerate meaningfully, it's going to make it more difficult to hold margins here?

The major play I guess what we so in 2011, we will work more man hours in our plan in 2011 than we did in 2010. We are reducing our under-absorption there. If top line - - I guess the bottom line is we expect top line to grow in 2011. How much is debateable but from what we are seeing in our backlog. If you look at our backlog and everything else, we can't see much beyond the second quarter, but we are sure starting out a lot better than we did in 2010. If you saw a flat year, you would be correct, but we don't see a flat year. Even with a flat year, I think we've got our expense levels down at a much lower level than we had starting our this last year. We have reduced, most of our reductions really kicked in the first half of 2010, and we have not - - we basically brought back direct labor during the year as volume picked up with the exception that we have added in the mining sales force side of it. And in some of our international sales forces, but otherwise SG&A is pretty well stayed level other than those expenditures toward personnel.

Okay. That's helpful. Thanks for your time.

Okay.

And then just looking at the Asphalt business, is some of that just kind of basically folks haven't done the main thing they need to do and it is kind of a forced CapEx? And if you are only seeing parts of plants, can you talk about is there a significant margin differential versus a whole plant?

The last question first. Probably better margins in components than the full plant sometimes. A little more engineering work on it, so, probably a little more expense. But generally the margins are a little better on components than they are on entire plants. Domestically, I think your comment is correct. It basically people domestically are - - the public companies are kind of upgrading what they feel like that they can get a quick return on.

The private companies are probably many of them are buying because of the accelerated depreciation. The other thing is the change in type of work. In a bad economy, or poor economy, I should say, we sell more portable equipment that's got wheels on it that will move. And as the states tend to let larger jobs - - because they want to try to get better prices - - so the bulk of what we are building domestically I would say 70% of it has wheels on it.

So, you will see people who - - have people in this week that were, has got three stationary Asphalt plants and they are buying a portable plant. So you will see them buying portable plants to move around, and that tends to help our business. So that - - the change in product mix that they need to have a different product certainly helps in a changing economy or in a tough economy like this. Internationally, it is a different picture. Or there is a just a lot of growth internationally and a lot of new work, so it is a mix of both permanent and portable asphalt plants.

That is helpful. Thanks for your time.

Okay.

Our next question comes from the line of Jason Ursaner with CJS Securities. Please proceed with your question.

Good morning, everyone.

Hello, Jason.

Don, first question I have and probably a couple of others have asked about this. But the backlog and the strong sequential increase, particularly in Asphalt and Ag and Mining. You mentioned the number of different trends on the call so far; shipment delays, the depreciation and pent up demand. How much of it is really an increase is normal domestic seasonality, versus some of these other factors?

In Aggregate Mining side of it, it is very heavily weighed to international. I wouldn't say it is necessarily a seasonal thing. In the Asphalt side, at least the domestic portion of it, it is somewhat seasonal helped by the clarity that was on the tax bill. Everybody was somewhat sitting in paralysis in the fourth quarter until after the elections and then they saw what was gong to happen on the tax cuts and then it was bumped a lot by the accelerated depreciation. So the combination of seasonality and clarity that helped them go ahead and pull the trigger domestically. International in the Asphalt side was very strong in two or three, in South America, Canada, a number of different markets around the world, so that wouldn't be seasonal.

Okay. And the Mobile business, you talked about it not being a backlog business, but even relative to last quarter, backlog almost tripled. How far out is visibility in this segment that favorable trend cans remain sustainable even with the Tier 4 kind of behind us now, the Tier 4 change over?

You know, I am pretty - - I guess very excited about how they have done. If you go back to 2009, I mean, we just basically were in paralysis the first three months. We built up a big inventory of finished goods during, from April on in 2009 we shipped a lot of those out. But the problem with the backlog there now, is we've got orders and we can't built enough machines. So, typically most of our competitors go through dealers and they stock up machines and they've got them. And normally we have to have a finished, pretty good finished good at inventory to match that.

Right now backlog is not necessarily a good thing for us. Thank goodness people are willing to wait on it. But, we are shipping all we can build over there right now. Plus, a lot of the other products that we've introduced are kicking in over there, the stabilizers. We've just introduced a new line of self-propelled brooms that clean up behind the milling machines and we have another product line we will be introducing later in the year.

Okay. And then, a quick follow-up on David's question. The gross margin is pretty similar on a sequential basis, but almost 7% higher revenue. Most of the sequential increase is in the Aggregate and Mining segment, which really didn't show a lot of leverage on the increment volume. So is some of this revenue from maybe wood pellet equipment, lower margin, or were there pricing challenges to try to understand why it didn't show better leverage?

We had a lot of R&D particularly related to the pellet thing at BTI. We've had a huge amount of under-absorption in those companies. We've had a lot of under-absorption there that is now beginning to kick back in. So - -

Okay. And then just quickly on SG&A, since ConExpo wasn't a major one-time expense in the quarter. You talked about the year-over-year increase but I am trying to figure out what is driving the sequential increase in R&A. Is it the same factors or were there some true-ups for expenses from levels you have been accruing at for the year?

It is same factors. We had more for the year, profit sharing expense just because we made money and a number of them met their targets in the business. RSU expense served payroll was up - - slightly. But mainly just commissions, things like that. Commissions and travel are both up. And more international business, more travel.

Okay. And acquisitions, you have a lot of cash and liquidity. What are you seeing in terms of quantity and quality of potential targets out there?

Quantity is increasing and quality is decreasing.The ones - - we see a few private equity Groups trying to spin off some of there's. But they have sure got an inflated sense of what their values are. So we have not been very successful. We have looked at a lot of deals, but the quality is not the greatest, and the expectations are still pretty high. We are - - we are looking more internationally right now. There are certain countries we can't get into due to the protectionism, due to the tariffs and looking at those. But, we have a number that we are looking at but we haven't been successful. Really been a little frustrating the last year or so.

Okay. Great. Thanks for taking all my questions.

Thank you.

Our next questions comes from Ted Grace with Susquehanna.Please proceed with your question.

Thank you. Good quarter, guys, congratulations. I was just hoping to dig in on the domestic side. Maybe we could go through a scenario. We think about federal funding certainly in 2011 is flat, probably 2012. We would argue that states are at best flat and there's maybe an argument to be made that they are actually down.

We think stimulus dollars for road and highway will be down probably on the order of 50% this year. And so, thinking about the offsets, you've obviously talked about the accelerated depreciation. But in that kind of environment, would you think that possibly your domestic clients are now set with equipment for next year and that could be a more likely source of downside risk for 2011? Certainly, the other thing to think about is some of the survey work that has been done that would similarly point toward pretty bearish expectations on equipment purchases for domestic road and highway guides. So, any color there would be helpful.

I think, Ted, you've got to look at each segment of the construction side of it. Home building is coming back very slowly. I mean, it is way, way down. We've seen - - as you compare with the bottom, it is going up. But as you compare with 2007-2008, it is still pretty sad. We are in kind of a sweet spot in that there's not going to be many, if any, new roads, new bridges, things like that built, those big projects.

But there is a continuing need for, as I said earlier, kind of the road. The top of the road surface which 80% of your asphalt goes to is the roof of the road. If you don't fix it, you will tear up the whole road. It is like a roof on your house leaking. So, what money does get to be spent seems to be getting spent on asphalt. As a proportion of the money spent, it is probably an inordinate amount going to that top two inches of the pavement.

So, we see it as okay. I mean, to say we are going to have a boom building market, no, I don't see that for a while. But I do see the turn coming. I think that we are better than we were in 2009 and a little better than we were in 2010. But, it is probably going to be another 18 months to a year before you see a strong market again, domestically.

Sure. And then in terms of the near-term prospects for recycling of roadway surfaces. How is that progressing and how do you think that benefits the Company relative to the market more broadly?

We have the best equipment and probably the highest technology equipment to be able to do that. We are spending R&D money looking ahead to where we would recycle up to 100% of the existing road. But the states are all wanting to stretch their dollars and recycling plays right into that. At the Napa meeting, I was listening to the tons of liquid asphalt that was used last year, which was 23.6 million tons of glue gluing the rock together, so to speak. If you looked at how many tons of hot-mix you could make, it would be 472 million tons at zero recycle. At 25% recycle you get to like 600 million tons you could make with it. At 50%, we could make 944 million tons.

So, we are going to be increasing the amount and the states are seeing more and more of that. The research at the National Center of Asphalt Technology shows that we can do a 50% recycle road and get equal or better performance than we are getting out of all virgin material. So, that is aligned the states to do more with less money, more tonnage. And our contractors or customers look at tonnage and they wire equipment out based on tonnage, too. So we feel that that is probably the real salvation of the asphalt industry, is being able to reprocess and reuse what you've got.

Okay. And then two quick follow-ups. I don't know if I just missed it, but did you make my commentary on the outlook for parts and services in 2011?

You know, I didn't, but we see that as a continuing growth market. The Asphalt side of the business has been more aggressive at growing the parts business and putting direct salesmen out. Our Aggregate people are now doing that and they are seeing a real increase in parts sales from doing it. And I am talk domestically here. In the Asphalt side, they put international parts salesmen on which are bilingual, so we see a continuing market in that growth in all segments in that business.

And in light of the improved orders in this quarter and kind of the progressing trends. Just to understand, that growth market, would that be you are saying an absolute? Or relative you still can take share from your original equipment side in 2011?

We think we will continue to improve our market shares practically each segment, particularly in the Mobile Asphalt and then the Asphalt plant market.

I am sorry, so you think parts and services grows faster than your new equipment sales?

I think it grows - - I think we're going to have a new equipment sales growth due to where we are starting from with being pretty good this year. But parts is probably going to be equal to it.

Okay. And then the last question, and I will jump back in queue. As we think about free cash generation, any reason to think we would see margin shifts in any of your working capital metrics?

Typically, we will use 35% of the capital employed. We probably have, depending on the product mix, we have the bricks and mortar to probably do up to $1.4 billion in volume. But as you do that, you will use a lot of cash. Your inventory is going to go up, your receivables, everything else. So, typically you can back into it from that. The capital employ generally averages about 35% of sales.

Okay. Good. Best of luck for 2011, guys.

Thank you.

Our next question is from Morris Osomond with Griffin Securities. Please proceed with your question.

Hi, guys.

Good morning.

Most of my questions have been asked, but just a few follow-ups. One again on the SG&A question. There were a couple questions on that.Is there any calculation in the fourth quarter, it was 19% of sales. And understanding - - you spoke about commissions being up, travel, receipts, etc. But, 19%, it just seems a little high. I don't know if you look at it in that light. But should we have leverage on that SG&A as the model improves as revenues grow even modestly? How does that play out? Because 19% is high looking over a number of quarters in the past.

Yes. We like it to be in the 14% to 15% total. I guess the thing I would say is we conscientiously made the decision to not reduce our SG&A or engineering or actually to grow our sale's force during this downturn. We had the ability to do it financially and we felt like we could use this time to develop new products and increase market share and it is too high for where we are right now. We think we will grow back into the 14% or 15% level.

Okay. So, it is fair to surmise then, looking out into 2011 that we won't see a 19% number again? It will be trending down? Is that fair?

That is our intention.

Okay. Got you. Second question, you said generally backlog is up for the year-end. Can you give any sort of more granularity either overall or by Groups? Is it a single-digit increase? Is more than that?What can you add to that statement?

Well, if you notice, the biggest increase basically is in year-over-year. Asphalt is up about 44%, Aggregate Mining 71%, Mobile which we talked about earlier, it's up 318%, but it is not real meaningful. Likewise in the Underground, it is up a little bit from - - it's up from zero, basically. So, I would say that the Mobile and the Underground is not very meaningful. The Asphalt is and the Aggregate is. The Aggregate is primarily being helped by the international Aggregate and Mining sales, not too much domestically. Same way with Asphalt. It has been helped by international, but it perked up at the end of the year quite a bit, so - -

So, basically those trends that you saw from fourth and third quarter, kind of similar with what you are seeing for January so far into first quarter?

Yes. We see continuing sales during the first quarter. In fact, our backlog, we don't generally announce it, but our backlog as we speak, was higher than at year end.

Right. That is where the question is focused on, in talking about January. Modest improvements, some of the trends that we are seeing into the fourth quarter versus third quarter. You want to comment on that at all?

Well, I would say this. We typically force domestic sales, you see the strongest time of the year typically as being November, December and January as being the strongest at sales for getting orders. And when you really - - over the prior year, if you look at it, we are at the - - Jamie, this is January 11, somewhere we are 100% over the prior-year.

$100 million.

$100 million. They just handed me some numbers here. I would say it is about 100%, or $100 million over the prior-year right now as we speak.

Just, you threw a lot of numbers up earlier. I think I got these right. 2010 CapEx was $11.3 million, 2011 you are projecting $29.4?

That's correct.

And what was the depreciation amortization numbers for 2010?

18%. And for 2011, 18.8%

18.0% for 2010 and 18.8% for 2011?

Correct.

Thank you.

Thank you.

Our next question is from Todd Vensil with Davenport and Company. Please proceed with your question.

Good morning, guys. A lot of questions have been knocked out but I did have a clarification and then a follow-up. Dr. Brock, did you say that you thought that if we had a long-term highway reauthorization pass that was smaller than the prior bill, that that would still be better for your customers than the sort of current continuing resolution regime?

No, I said just the opposite.

Got it.

The problem is right now, the government is spending - - I guess I think we're over emphasized the Federal Highway Bill anyway. Because in 2006 the Highway Bill in 2007, the Federal Highway Bill was about 30% of all the money spent on roads. You have the states, the cities, the counties, all of those and private stuff. And that has been typically not good, but is coming back slowly. We are seeing residential come back a little bit, mainly commercial though. A lot of manufacturing plants, commercial things beginning to at least stick their head up a little bit.

But, generally on the Federal Highway Bill, that is all used on the national highway system roads which is your interstate's and US roads. And that money, states which match it 20% on the interstate and 40% on the US roads, they will not do, generally - - with a few exceptions, they will not do any engineering on a large bridge or an interchange or things like that until they can see out in too future four, to five, to six years. With these extensions, they can't see that and as a result, they don't do the engineering on these larger projects. And so if the same amount of money is coming in, where do you put it? Well, you put on redoing the road surface, which generally is needed. And so there is a disproportionate that goes to the asphalt side. If you had a flat highway bill or a down highway bill and you do a few of these $400 million bridges, it plays havoc with paving.

That makes a lot of sense. Do you think at this point that the states, given what you just said about the states needing visibility to do the big projects with heavy engineering and longer term. Do you think the states at this point are under spending of their own money the amount that they would be spending if they had more visibility? Or do you think they are spending the same amount of money and it is just as you say, flexing toward asphalt?

On the state roads, if you really want to look at where you pent up demand over the last two or three years, the states have used a disappropriate amount of their money to match the federal money. And that has been on the 165,000 miles of the national highway system. There is another 2.235 million miles of state, city, county roads that have really deteriorated a heck of a lot. And over the last year there has been - - over the last five years there has been 43 states that have increased their state road tax, or user fee, I prefer to call it.

Last year I think the biggest thing, people will vote for a tax increase on fuel if you will guarantee them you will use it for fixing the roads instead of diverting it to transit and some of these other silly things. So, I think what we are seeing is the states typically - - you look at the [$0.184]. California's state total tax is $0.66 a gallon, Illinois is in the $0.60's. So the total amount they are collecting is a whole lot more than [$0.184] that everybody focuses on. Now it does get diverted off as you said.Some states pay for Highway Patrol and other things. But there is more money in the state coffers from a standpoint of spending on roads than there is federal money.

Got it. And then, for Astec, when you thing about - - just looking at past cycles and how you think this one is likely to play out. When and if we ever get a long-term extension that you suggest would be needed to drive real growth, in the US longer-term. What sort of lag in your business typically from that kind of thing going through?Where do you see it in orders and revenues?

Well, again, domestically what we see is when you get a new highway bill, generally within six months we see a pretty substantial pick-up. And we do better, our customers do better on the front end of the bills than they do on the back end of the bills, because, again, at this time to engineer these big projects don't happen immediately. The one thing I would say to you, though, is we are a different Company than what we were five years ago. Five years ago 18% of our business was international. We are getting in the mid- to high-40s now international. So, we have diversified our sales internationally. We have diversified the industries that we serve a bunch more. The oil and gas mining side of it, so we've tried to position ourselves where we are not so 100% dependant on infrastructure.

Got it. Thank you so much.

Thank you.

Mr. Anderson, there are no further questions in the queue at this time. I would like to turn the floor back over to you for closing comments.

Okay. Thank you, Kristine. We appreciate everyone's participation on our fourth quarter and year-end conference call for 2010. Thank you for your interest in our Company. As our news release indicates, today's conference call has been recorded.

A replay of the conference call will be available through March 5, 2011, and an archived webcast will be available for 90 days. A transcript will be available under the Investor Relations section of the Astec Industries website within the next seven days. All of that was information is contained in the news release that we sent out earlier today. This will conclude our call.Thank you and have a good day.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time.Thank you for your participation.